Managing reputation and maintaining legitimacy

Accounting

Speaker:Markus Milne, Professor/Canterbury
Date: Wednesday 20 June 2012
Time: 14.00
Location: Pearson Teaching Room

Further details

University of Canterbury
Managing reputation and maintaining legitimacy:
Understanding a company’s responses to sustainability issues
 
 
 
 
 
 
 
 
 
 
Sanjaya Kuruppu and Markus J. Milne
 
 
 
 
 


Managing reputation and maintaining legitimacy: Understanding a company’s responses to sustainability issues
 
ABSTRACT
Purpose
This paper explores the role of reputation management and legitimacy in driving company response behaviours around short-term and long-term sustainability issues. Current research is mainly limited to studies on external reporting. We add to literature by exploring the internal mechanisms and behaviours which lead up to external reporting. New theoretical insights are provided into legitimacy theory by presenting a framework linking aspects of reputation risk management, resource dependence theory, and stakeholder theory.
Design and methodology
Research is conducted through an in-depth case study in a wholly-owned foreign affiliate of a large multinational organisation involved in an environmentally sensitive industry. Data collection was extensive, including semi-structured interviews and non-structured talks with 26 participants from top management executives through to production workers, access to confidential reports, and participation in the company’s annual environmental seminar and a stakeholder engagement meeting.
 
Findings
Findings and discussion are presented on two research questions. Firstly, we create a distinction between the concepts of “reputation” and “legitimacy” in the case company. Secondly, we outline three short-term issues and a long-term strategic issue concerning environmental incidents or issues in the company. These cases illustrate how company response behaviours change according to three factors: 1) visibility of the issue, 2) stakeholder salience, and 3) the interconnectedness of stakeholders around the problem. Companies prefer direct action to contain problems where possible, and external reporting only features in some scenarios. We propose that reputation and legitimacy must be understood in terms of behaviours (processes)as well as external reporting outcomes.
 
Originality/value
There has been a considerable focus on external reporting in corporate sustainability research, particularly in the accounting literature. The work that has been done on internal systems has been largely limited to descriptive case study work to do with characteristics and preconditions of sustainability processes together with limitations in current practice. The purpose of this research is to produce an in-depth case study looking at company responses to sustainability issues. It provides some new perspectives on the well researched concept of legitimacy along with potential avenues for further theory development.


INTRODUCTION
The concept of sustainability and triple bottom line reporting has been widely researched and commented upon from academic, business and professional perspectives (see for e.g., Lamberton, 2005; Moneva et. al, 2006; Cho and Patten, 2007; UNEP/SustainAbility, 1994-2006; KPMG, 1993-2005; GRI, 1997, 2000, 2006; ACCA/CorporateRegister, 2004). However, there is still a considerable amount of uncertainty and confusion about how the concept should or could be operationalised in business (KMPG, 2008; Cowell et al., 1999; Milne, 1996; Gray and Milne, 2002; 2004). Despite the ambiguities over translating sustainability into daily business practice, the external reporting of information paraded in its name has mushroomed (see for example, Elkington, 1998; NZBCSD, 2002; GRI, 2006; Prince of Wales Project, 2010). Such reporting has been widely researched since it emerged from discretionary disclosures in traditional annual reports, to fully fledged standalone environmental reports, to so-called “sustainability” reports (see, for example, Gray et al., 1988; Gray et al., 1995; Gray et al., 1997; Milne and Gray, 2007; Gray, 2010). The external assurance of such disclosures too has been increasing and thus increasingly researched (KPMG, 2008, CorporateRegister.com, 2008; and see for example, Kolk, 2010; Simnett et al., 2009; Deegan, Cooper and Shelley, 2006 & 2007; O’Dwyer and Owen, 2005).
A particularly dominant theme in the research literature, largely if not exclusively derived from work focused on the external reporting and assurance phenomena, is that securing and maintaining organisational legitimacy is a strong motive for many companies to report social and environmental information, and particularly those of large size, high visibility and in environmentally sensitive industries (see for example, Patten, 1992; Lindblom, 1994; Deegan and Rankin, 1996; O’Donovan, 2002; Milne and Patten, 2002; Brown and Deegan, 1998; Deegan, 2002; Deegan and Islam, 2008; Milne et al., 2008). In fact, reporting (or perhaps more accurately ‘reports’) based research has utterly dominated the discipline (Gray, 2002; Parker, 2005; Parker, 2011; Milne, 2007), and only more recently has case study based work revealed a rather more diverse and inconsistent range of motives and methods of management control and external reporting (for example, Durden, 2008; Adams and Frost, 2008).
Adams (2002) was one of the first studies to investigate the internal reporting and decision-making process and identified significant internal contextual variables such as the attitudes towards reporting, the reporting process, and legislation and external verification impact on the quantity and quality of reporting. Later, Norris and O’Dwyer (2004) conducted interviews to explore the motivations and management control systems that encourage socially responsible decisions amongst managers. A key result was that managers were concerned that minimal formal processes were in place to measure and track social outcomes, thereby, refocusing managers onto financial objectives. Furthermore, a tension between formal and informal control systems was highlighted. Adams and McNicholas (2007) suggest that there is a lack of understanding about how sustainability goals and reporting practices should be integrated into strategic planning, how to identify key stakeholders and key performance indicators, and choosing between the variety of reporting guidelines and styles available. And, where indicators do exist, these measurement systems are not linked to decision making processes within the firm (Searcy et al., 2008). Adams and Frost (2008) qualify this by arguing that external reporting has led to developments in data gathering processes and decision-making, but the ability to implement sustainability processes is limited by the existing systems and methods inherent in the firm.
So far, not only has much research focused on external reporting behaviour without considering the internal mechanisms that lead up to it, it fails to consider how reporting might feed back into operational and strategic decision making (Ball & Milne, 2005). Much is understood about reporting outcomes (although arguably much less is understood about performance outcomes) than understanding the operational and strategic behaviours which lead up to those (performance and reporting) outcomes and vice-versa.
This paper seeks to explore corporate “sustainability” systems and the behaviour-decision-reporting linkages by marrying the growing body of work into organisational legitimacy theory with other management behaviour theories including reputation risk management, resource dependence and stakeholder theory. In the following section, we argue that reputation is akin to an intangible asset that needs to be managed according to the nature of negative incidents that occur and the salience of the stakeholders involved. In the following discussion section, we illustrate three short-term issues and a long-term strategic decision that impacts the future of the company in New Zealand. The concluding section summarises insights into the internal processes, behaviours and legitimating practices of a company that presents itself as engaging in sustainability.
 
STAKEHOLDERS, RESOURCES, REPUTATION AND LEGITIMACY
Legitimacy theory
There is extensive research on legitimacy theory as a major driver for companies to report social and environmental information (Neu et al., 1997; Deegan and Rankin, 1996; Deegan and Gordan, 1996). Brown and Deegan (1998) define legitimacy theory as a supposition that organisations “constantly attempt to function within accepted norms and customs of the communities in which they operate” (p. 22, see also, Dowling and Pfeffer, 1975; Deephouse and Suchman, 2008). This definition is commonly presented in a range of different disciplines and fields (see the literature review of legitimacy by Deephouse and Suchman, 2008 and Bitektine, 2005). Legitimacy is conferred by its ‘constituents,’ who are internal and/or external actors who make decisions about the legitimacy of an organisation (Perrow, 1970; Ruef and Scott, 1998). Early on, Sethi (1975) pointed to the problems that might arise when a ‘legitimacy gap’ occurs between constituents’ expectations and firm behaviours, and Deegan and Rankin (1996) claim that without legitimacy, the ‘social contract’ that society has with the company may be withdrawn (also see Sethi and Shocker, 1974).
Legitimacy, then, has positive spin-off’s and “justifies the organization’s role in the social system and helps attract resources and the continued support of constituents” (Ashforth and Gibbs, 1990 p. 177, citing, Parsons, 1960). Prior research shows that environmental information disclosures increase at times of increased public pressure – that is, when a legitimacy threat might be present or perceived (Deegan and Rankin 1996; Deegan et al., 2002; Cho and Patten, 2007). Deegan and Rankin (1996), for example, found that when Australian companies were under environmental prosecution they increased the quantity of positive environmental information they disclosed. Milne and Patten (2002) using an experimental design suggest that under certain circumstances, positive environmental disclosures can “repair” an organisation’s legitimacy in the face of negative environmental shocks. And Deegan et al. (2002) examined the social and environmental disclosures of BHP Ltd over a 14 year period and found that management of the company released positive non-financial disclosures to counteract negative media attention.
O’Donovan (2002) extends prior work by Ashforth and Gibbs (1990), Oliver (1991) and Suchman (1995) to explain “legitimation tactics” expressed in annual report disclosures. The quasi-experimental design used vignettes of different scenarios asking for managers to comment on their responses. Findings suggest that management responses to environmental incidents change according to whether they are trying to gain, maintain or defend legitimacy. The following table is adapted from O’Donovan (2002) p. 363:
 
 
Legitimation/intention of annual report disclosure
Purpose of response
Significance of event
Avoid
Alter values
Alter perceptions
Conform
Gaining
High
Medium
Likely
Likely
Very likely
Unlikely
Likely
Possibly
Very unlikely
Possibly
Maintain – high
High
Medium
Very unlikely
Unlikely
Very likely
Possibly
Likely
Likely
Very likely
Possibly
Maintain – low
High
Medium
Likely
Very likely
Possibly
Inconclusive
Very likely
Likely
Very unlikely
Unlikely
Repair
High
Medium
Very likely
Unlikely
Unlikely
Unlikely
Very likely
Very likely
Very likely
Likely
 
And as Sethi (1975; see also Lindblom, 1994) realised long ago, corporate communication can be used to (1) correct public misunderstandings of organisational performance, (2) alter the publics’ expectations of organisational performance, (3) communicate improved (social responsibility) performance, and (4) distract the publics’ attention away from poor organisational performance. This emphasis on the role of communication in legitimacy (and hence annual report disclosures), however, may have led to an overemphasis on such reporting and less emphasis on an analysis of the role of legitimacy and its antecedents in internal organisational systems and decision making.
 
Reputation Risk Management
New theorisations may serve to augment our understanding of decision making and its linkages to reporting and communication in a context of legitimacy. Bebbington et al. (2008a) claim that there is sufficient critique and debate in prior literature “which points towards the possibilities of more diverse and varying explanations of CSR reporting and the need to put “flesh” on the “bones” of legitimacy theory explanations.” (p. 338). While the novelty of RRM has been contested by some, (see, for example, Adams, 2008), proponents argue for pluralism and openness to multiple theoretical perspectives. Further, they see reputation and legitimacy as distinct concepts that should be differentiated.
 
Deephouse and Carter (2005) and Deephouse and Suchman (2008) provide a means by which to distinguish reputation and legitimacy. They suggest that legitimacy is a binomial measure which an organisation either has or does not. Reputation on the other hand is a measure based on a range of criteria which is conferred relative to the standing of other similar firms. Reputation is based on subjective evaluations by internal and external audiences. While reputation can be measured on many dimensions (Deephouse and Carter, 2005), Bebbington et al. (2008) suggest that most studies have used quantitative indices of reputation focussing on five elements: 1) financial performance, 2) quality management, 3) social and environmental responsibility, 4) employee quality, and 5) the quality of goods/services produced. In recent years, there has been a movement towards understanding reputation in a more holistic sense. While there is a growing body of literature (mainly in management) culminating in a number field reviews to refine the concept (see for example, Bitektine, 2005; Deephouse and Suchman, 2008; Barnett et al., 2006; Gotsi and Wilson, 2001), reputation is still a term that is interchangeably and confusingly used (Deephouse and Suchman, 2008). Therefore, it needs to be defined for the context of this paper.
Bebbington et al. (2008a), citing Fombrun and Van Riel (1997), suggest that there are two main perspectives for understanding reputation. The economic/management theme views reputation as a resource. Sociological literature considers reputation to be a socially constructed judgement about the integrity and dependability of an organisation. Therefore, it considers reputation to be an outcome of a process of evaluation of the company’s past performance (Deephouse and Suchman, 2008). The management literature provides a fruitful conceptualisation of “reputation” through a resource based view of organisations. Favourable reputation is considered a strategic asset that firms can manage to gain a competitive advantage (Deephouse and Suchman, 2008; Deephouse, 2000; Roberts and Dowling, 2002), essentially becoming part of the relationship between “exchange partners” and their decision making processes (Deephouse and Suchman, 2008 p. 62). Fombrun and Van Riel (1997) argue that reputation “produce[s] tangible benefits: premium prices for products, lower costs for capital and labour, improved loyalty from employees, greater latitude in decision making, and a cushion of goodwill when crises hit” (p. 57; see also, Bebbington et al., 2008a p. 339). McWilliams and Siegel (2001) suggest specifically that CSR related activities create a reputation that a firm is honest and reliable. Citing Fombrun and Van Riel (1997) again, Bebbington et al., (2008a) suggest that “maintaining a good reputation may be a sound business decision because it could help you withstand future reputation shocks” (p. 339).
The main thesis behind Bebbington et al.’s (2008a) work is that Reputation Risk Management must be considered as a motivation in its own right. However, reputation and risk are proposed as intertwining concepts. Fombrun et al. (2000) is quoted as stating that “reputation capital is at risk in everyday interactions between organisations and their stakeholders with risks having many sources (such as strategic, operational, compliance and financial)” (Bebbington et al., 2008a p. 340). To understand this risk management behaviour, Bebbington et al. (2008) propose adopting Benoit’s (1995) framework of image restoration strategies. Bebbington et al. (2008a) analyse the Shell 2002 annual report and frame the reporting discourse against Benoit’s (1995) framework. They find evidence that Shell may be applying image restoration techniques according to the framework to manage their reputation.
Bebbington (2008a) use Reputation Risk Management to analyse external reporting behaviour. However, they also recognise its potential to understand how organisations meet diverging demands of multiple stakeholders and that different stakeholders possess relative levels of power and urgency, and hence may elicit different responses from management based on their perceptions of stakeholders’ abilities to provide (or withhold) critical resources. To date, the literature on external sustainability/CSR reporting has been substantial. Considerably less emphasised have been the mechanisms and systems which underlie the external façade adopted by organisations. For example, while reports may convey the discourse that is finally reported, how does the reporting function consider what information to report and to whom? How do managers view reputation and how do they try to manage it? What is the importance of reputation in decision making? Bebbington et al. (2008a, p. 355) suggests that a “possible avenue of research in this area could explore a more sociologically informed analysis of reporters’ motivations (via interviews and/or case studies)”. The present research is grounded in trying to provide some, albeit tentative answers, to the questions above by augmenting legitimacy theory with reputation risk management, and further drawing on understandings from resource-dependence theory and stakeholder theory.
Before turning to the field work and the case study, the following sections briefly illustrate key aspects of resource dependence theory and stakeholder theory.
Resource dependence theory
Although one might see the origins of resource dependence theory in Cyert and March’s (1963) Behavioural Theory of the Firm, it has certainly come to be seen as a major theoretical framework since Pfeffer and Salancik’s (1978) The External Control of Organisations (Hillman et al., 2009). The organisation is defined as a fluid system that reacts to and is shaped by external factors. Pfeffer and Salancik (1978) propose that to “understand the behaviour of an organization you must understand the context of that behaviour – that is, the ecology of the organization” (p. 1). This perspective of an organisation is very much in line with the view taken by institutional and legitimacy theory in that an entity has to continually understand and adapt to contingencies in the external environment.  
Hillman and Keim (2001) argue that “[t]he resource-based view of the firm (Barney, 1991; Penrose, 1959; Wernerfelt, 1984) contends that a firm’s ability to perform better than the competition depends on the unique interplay of human, organizational, and physical resources over time (Amit and Schoemaker, 1993; Barney, 1991; Dierickx and Cool, 1989; Lippman and Rumelt, 1982)” (p. 127). Managers have the ability and responsibility to reduce environmental uncertainty and dependence by commandeering power which is crucial to securing important resources (Hillman et al., 2009; Ulrich and Barney, 1984). Organisations therefore strategically seek to minimise the power exerted over them by external actors and increase their own legitimate claim to action over others (Hillman et al., 2009 p. 2). This may motivate some of the urgency of action over externally visible issues which could lead to censorship of the organisation and potential threats to its licence to operate. Indeed, Hillman and Kleim (2001) argue that a “history of repeat dealings with actors such as employees, customers, suppliers, and local communities that generate reputational capital and trust (Barney and Hansen, 1994; Ring and Van de Ven, 1992, 1994)” (p. 127).
We have already presented an argument to view reputation as a resource that must be managed. Resources which are difficult to replicate and intangible are argued to lead to competitive advantages over competing firms (Hillman and Keim, 2001 citing Atkinson et al., Barney, 1991; Teece, 1998). Indeed, Russo and Fouts (1997) argue from a resource-based perspective that environmental policy plays a role in gaining broad organisational benefits which allow them to earn “premium profits.” Organisations interact with other parties in a given field creating relationships where “reputation is important and fair dealing and moral treatment by both (or multiple) parties enhance the value of relationships” (Hillman and Keim, 2001 p. 127). These exchanges are important to secure resources for each party, where reputation is also an asset that needs to be managed and protected. We argue that reputation is developed between the organisation and many stakeholders in different ways. The reputation built with customers in terms of the quality of product that is supplied may be quite distinct from the reputation that is built with communities around the organisation where people may see the company as a good corporate citizen. Although different types of reputational asset may be created between diverse stakeholder groups, there is possibility for migration effects between them because of the inter-connectedness of organisations (Harrison and St. John, 1996). Pfeffer and Salancik (1978) introduce the resource dependency perspective and interorganisational relations as five prepositions, three of which are highlighted below:
 
2) these organisations are not autonomous, but rather are constrained by a network of interdependencies with other organisations; 4) organisations take actions to manage external interdependencies, although such actions are inevitably never completely successful and produce new patterns of dependence and interdependence; and 5) these patterns of dependence produce interorganisational as well as intraorganisational power, where such power has some effect on organisational behaviour. (p. 26 – 27)
A key aspect of resource dependence theory is the inter-connectedness of different parties in the organisational field and how these relationships may change because of the power (or salience) that some may exert over organisations. Pffefer and Salancik (1978) suggest five actions that firms can take to minimise environmental dependencies but these are mainly limited to financial or governance issues such as board of directors management, mergers and acquisition and executive succession. Hillman et al. (2009), after conducting a field review of resource dependence theory, suggest that it is well explored with “evidence across each of these areas validates the reciprocal effect of uncertainty and interdependence on firm action (p. 12). However, they do suggest that “research using RDT [resource dependence theory] should talk to one another to more fully appreciate how dependencies are reduced” (Hillman et al. 2009 p. 12). Stakeholder theorists have argued that organisational survival depends on a company’s ability to provide value to its stakeholders “to ensure that each primary stakeholder group continues as part of the corporation’s stakeholder system’ (Clarkson, 1995 p. 107). Particular important, as part of the stakeholder system, is the ability to understand, prioritise and connect relationships and interdependencies (Donaldson and Preston, 1995; Harrison and St. John, 1994; Freeman, 1988). We will introduce some important issues from stakeholder theory in the following section.
 
Stakeholder theory
Freeman (1984) asserts that stakeholder theory concerns an understanding of entities which can impact an organisation and management’s responses to those entities. As such, it has clear overlaps with resource dependence theory which conceptualises the management of power between relationships. Stakeholder theorists argue that the company must pay attention to the environment and the constituents that make up its environment. It is argued that “[a] network of relationships connects the company to a great number of interrelated individuals and constituencies, called stakeholders” (Perrini and Tencati, 2006 p. 297; see also Freeman, 1984; Donaldson and Preston, 1995; Post et al., 2002). These relationships are important for the success and survival of the firm and must be managed appropriately (Post et al., 2002). In this sense, Phillips et al. (2003) argue that stakeholder theory is similar to resource-dependence theory which lends confidence to a model attempting to interconnect the two perspectives.
The preceding discussion of resource dependence theory in section 2.2.3 suggests that power exerted over the organisation by external constituents needs to be managed. Stakeholder theory purports that there are various levels of stakeholder importance (Post et al., 2002; Madsen and Ulhoi, 2001; Frooman, 1999). The salience of stakeholders may have a considerable influence on the way companies interact with external parties, and exemplified “[t]he survival of many structures, organizations and organizational forms without ringing cultural endorsement suggests that there may be some truth to this. But in the absence of broad-based cultural support, the characteristics of those particular sources that do grant endorsement may matter quite a bit” (Deephouse and Suchman, 2008 p. 57).
Mitchell et al. (1997) is a seminal paper which introduces three attributes of stakeholders: 1) power, 2) legitimacy and 3) urgency. Citing Weber (1947) and Salancik and Pfeffer (1974), Mitchell et al., (1997) recognise that the power of a stakeholder can be defined in terms of a stakeholder’s ability to achieve their desired outcomes. Legitimacy, in the context of Mitchell et al.’s (1997) paper, refers to the legitimacy of power held by a stakeholder. Finally, urgency adds a dimension between the relationship of a company and its stakeholder and refers to the immediacy of the stakeholder’s need, and the importance of their demands.
Prior research has found that companies have changed their decisions because of external pressure from stakeholders that may eventually cause reputational damage (Perrini and Tencati, 2006 referring to Klein, 2000; Hertz, 2001; Bandura et al., 2002; Bakan, 2004). Post et al. (2002) suggest that “[t]hese relationships are the essential assets that managers must manage, and they are the ultimate sources of organizational wealth” (p. 8). I extend this argument, to incorporate a conceptualisation of reputation as the asset which must be managed to gain, maintain, or repair relationships between salient stakeholders. Frooman (1999) adopts a resource based focus on stakeholder theory to suggest that stakeholders have inter-relationships with one another. Influences on one group may have causal effects on other stakeholders. These ideas will feature in the development of the ‘stakeholder web’ model introduced in the Discussion and Analysis section.
There are a number of perspectives on stakeholder theory. We have adopted an instrumental perspective which provides a basis for examining how the management of a company may manipulate stakeholders in order to achieve their corporate agenda. The key area of focus with this perspective is on whether stakeholder management has positive spin-offs for corporations, especially since this particular seam of the theory has been under-researched (Berman et al., 1999). Instrumental stakeholder theory aligns well with resource-dependence theory in the sense that: “corporate survival depends in part on there being some "fit" between the values of the corporation and its managers, the expectation of stakeholders in the firm and the societal issues which will determine the ability of the firm to sell its product” (Freeman, 1984 p. 107).
In the input-output model of stakeholders, investors, employees and suppliers contribute inputs which the firm then transforms into outputs which are sold to customers (Donaldson and Preston, 1995). This perspective takes an economics/finance oriented view of the transactions and proposes that each stakeholder that provides resources (via legal contractual transactions) to the corporation receives rewards for their efforts. Clearly, in light of the discussion of legitimacy, reputation and resource dependence, a more nuanced and complex understanding of stakeholder relationships is required in which exchanges beyond transactions, including symbolic exchanges, are articulated. Hillman and Keim (2001) emphasise the value that can be created between companies and stakeholders through relational interactions rather than transactional ones. Harrison and St. John (1996) introduce examples where webs of interdependencies can arise between stakeholders as organisations deal with increasingly uncertain environments (Hillman and Keim, 2001).
The theoretical perspectives which guide the current study have now been established. The following section introduces prior literature on external sustainability reporting with a focus on trends in current practice and gaps in knowledge.
Formulation of research questions
Legitimacy theory and Reputation Risk Management have mainly been seen by investigating external reporting behaviour of organisations (Tregidga et al., 2007; Bebbington et al., 2008a). This provides a limited perspective on how and if organisations see sustainability related initiatives as ways to legitimate their operations or manage risks. Reputation is a lucid concept that has a number slightly varied of dimensions because of the interdisciplinary nature of prior research (Deephouse and Suchman, 2008; Deephouse and Carter, 2005; Bitektine, 2005). A popular way to distinguish reputation from legitimacy is by theorising it as an ‘intangible asset’ that leads to future reward through financial gain or damage mitigation (see for example, Fombrun and Van Riel, 1997; Deephouse and Suchman, 2008). Legitimacy is considered a bimodal concept where companies either have legitimacy or do not. This creates an interesting possibility in understanding company behaviour around reputation and legitimacy management at the company. Following prior research in management accounting, decision making contexts have been broken down into short-term operational issues and a long-term strategic decision. We harness understandings from stakeholder theory and resource dependence theory to investigate how issue visibility, stakeholder salience, and stakeholder interdependencies affect priority setting and decision outcomes (O’Donovan, 2002; Mitchell et al., 1997; Donaldson and Preston, 1995).
1) What is the distinction between how reputation and legitimacy are understood at the company?
2) How does reputation management and legitimacy feature in company action around sustainability related incidents?
The following sections will outline the method adopted for this research.
METHOD
The case company
The Group Company is a large multinational that is located across tens of countries and operates in an environmentally sensitive industry. Revenue totals hundreds of millions of dollars. The company has been active in New Zealand for decades, with the division employing hundreds of employees across a diverse range of operating sites. Its corporate strategy has been about strategically expanding into markets and divesting from units as needed, especially if profitability was at stake. The group of companies is controlled and managed by Headquarters, the global base of operations. The global CEO and his team make decisions that span the whole company’s strategic operations and even capital investment decisions in the individual sub units of a country. Each defined geographic area of the world is managed by a different Regional Director who reports to the Headquarters. They are held responsible on a range of different indicators including financial, production, environmental and Health and Safety goals. These Regional Directors are responsible for a portfolio of Managing Directors who run the subsidiary operations within a particular country.
The research site was the New Zealand subsidiary of the international company. While the national subsidiary holds a close relationship with its parent company facilitated by a comprehensive reporting regime, a reasonable amount of autonomy is allowed for the local board of directors to govern operations as necessary in line with the parent company’s philosophy of “International benchmarks. National control.” This dynamic presents a very novel case study of how an international company deals with the pressure to satisfy global trends and requirements, and balance this with the realities of factors specific to each locality it operates in.
The New Zealand subsidiary operates a quasi-business unit structure. There are three operating business units each headed by a General Manager who is held accountable to the Managing Director. There are several functional silos such as Human Resources, Finance and Health and Safety that provides direct support to the operating units or are commissioned to do work that is important to the whole entity, but that is not directly under a business unit.
The company had implemented an Environmental Management System since the early 90’s just after the release of the Brundtland Report, 1987. This has been extended to incorporate ISO 14001 environmental certification and sits alongside the ISO 9001 quality standard the company also attains. The company has a very comprehensive and systemic reporting and control structure on five tailored perspectives based on the Balanced Scorecard. These perspectives include cost, Health and Safety, environmental, financial and quality perspectives. The reporting system spans multiple layers, both across the entity in New Zealand, and also internationally. Health and Safety has been emphasised as extremely important to the company for a number of years, particularly because of the safety hazards on some global operating sites which have lead to relatively frequent worker accidents and injury. While the New Zealand division has avoided serious harm to an employee for a number of years, these incidents continue to occur in other countries, especially in the developing world. To ensure consistency and accuracy of control systems and reporting, workplace audits are conducted regularly and cover a number of elements under Health and Safety, Accident Prevention, Environmental Accident Prevention and Quality assurance.
The company in New Zealand has produced an ‘annual report’ that summarises its Triple Bottom Line performance. This information is aggregated into a World Sustainability Report prepared by Headquarters. The annual report is not produced because of external requirements. This company has reported for a number of years and has developed a consistent reporting format. Stakeholder engagement arising from the report is minimal, however, the company organises a number of stakeholder meetings at its major operating sites.
Sustainability strategy
The sustainability strategy is mainly formed during an Annual Meeting on the Environment. This is a two day event that connects together every employee involved in an Environmental or Health and Safety function at the company. Vision building is considered to be participative. The strategy-setting framework is initiated in a top-down fashion with a NZ Board Member and other senior employees outlining the role of the Environmental/Health and Safety function to “make our managers aware of the risks” so that the Board of Directors do not get any surprises. The environmental/health and safety employees understand that they usually do not have any direct influence but must work to increase the awareness of line managers.
The key vision statement to arise from the meeting is that compliance is almost taken for granted at the company now. The meeting decided that the vision should be to maintain “licence to operate.” This was especially important at the time because the company received an environmental infringement that year which tarnished its perfect record from previous periods.
Environmental priorities were defined as the following for the 2010/2011 period:
1. Absolute commitment to sustainability, biodiversity and the environment
2. Social engagement is a SD (sustainable development) priority
3. “We have a high value reputation that we need to sustain.”
While not directly stated during this particular session of the meeting, Health and Safety is ingrained as a very important priority. From these priorities, a brainstorming session at the Annual Meeting gathered ideas from all employees about how to meet these environmental targets. Some objectives for retaining licence to operate that were discussed were to increase training over incident management, waste management, retain ISO 14001, community engagement and maintaining environmental biodiversity. Key Performance Indicators are then more definitively set by the Sustainability Manager and passed on to the Managing Director and Board for final approval. Indicators are then included in the Environmental Management System, tracked, and reported on.
Sustainability reporting
The company in New Zealand has produced an annual report that summarises its Triple Bottom Line performance. This information is aggregated into a global social and environmental report prepared by Headquarters. The annual report is produced voluntarily because it is not necessitated by external requirements. This voluntary reporting practice has been in place for a number of years and has developed to a consistent reporting format. Stakeholder engagement arising from the report is minimal. However, the NZ subsidiary organise